It's no secret that 2015 has been a terrible year for Advanced Micro Devices (NASDAQ:AMD). Revenue collapsed as the company lost market share to both Intel (NASDAQ:INTC) in the CPU market and NVIDIA (NASDAQ: NVDA) in the GPU market, a situation made worse by sluggish demand for PCs. AMD has reported a net loss in each of the last four quarters, and during 2015, the company wrote off inventory related to its APUs on two separate occasions. During the third quarter, revenue declined by 26% year over year.
Despite all of the problems AMD is facing, 2016 has the potential to be the best year for the company in quite some time. On the CPU front, AMD plans to launch a new CPU architecture, called Zen, toward the end of the year, promising major performance improvements. On the GPU front, AMD plans to revamp its entire lineup, doubling performance-per-watt in the hopes of being more competitive with NVIDIA. And on the semi-custom front, AMD will begin booking revenue for its latest design wins during the second half of 2016.
Zen could be a big deal
AMD made a major misstep in 2011 with its Bulldozer microarchitecture, and its subsequent revisions haven't solved the core problem. In terms of single-threaded performance, comparable Intel processors vastly outperformed AMD's efforts, and the company's shares of both the PC market and server market collapsed. According to Bloomberg, Intel chips find their way into more than 80% of PCs, and Intel has a near monopoly in the server chip market.
Zen has the potential to make AMD competitive once again. The company is promising that the new chips will bring a 40% increase in instructions-per-clock compared to AMD's previous architecture, helping to close the performance gap with Intel. Zen will also be built on a FinFET process, most likely at 14nm. If AMD launches Zen on time, both AMD and Intel will be at 14nm at the same time, thanks to Intel's decision to push back the launch of its 10nm process to late 2017. If AMD can put out a competitive CPU, the company's market share could be due for a rebound in 2016.
AMD has also had trouble in the GPU market. The company has been losing market share throughout 2015, and at the moment, NVIDIA claims a unit market share of about 80%.
AMD's latest graphics card launch was mostly a dud. Its high-end products, the Fury and Fury X, failed to disrupt NVIDIA's lineup, and the rest of its new products were simply rebranded versions of older graphics cards. The much-touted high-bandwidth memory AMD included in its high-end GPUs failed to give the company an edge, and NVIDIA's gaming graphics cards continue to sell extremely well. During the third quarter, NVIDIA's gaming revenue jumped 44% year over year.
In 2016, both AMD and NVIDIA are expected to launch new graphics cards, and both companies are expected to move to either a 16nm or a 14nm process after being stuck at 28nm for years, in addition to using the second-generation of high-bandwidth memory. AMD has been playing catch-up ever since NVIDIA launched the GTX 970 and GTX 980 last year at disruptive price points, but if the company can release competitive products in 2016 alongside NVIDIA, it could begin to claw back some of its lost market share.
Sales of semi-custom SoCs for use in the major game consoles have provided AMD with a much-needed source of revenue and profits, helping to partially offset weakness in the rest of its business. This revenue will eventually begin to decline, however, as sales of the PlayStation 4 and Xbox One peak sometime in the next few years. At the moment, the game consoles are the only source of semi-custom revenue for AMD, but starting in late 2016, that will no longer be the case.
AMD first announced two semi-custom design wins in late 2014, followed by a third design win earlier this year. The first two are expected to generate a total of $1 billion of revenue over the course of three years, beginning in 2016. During AMD's latest conference call, CEO Lisa Su confirmed that revenue from these products would begin during the second half of 2016. No details on the third win have been released, but it's possible it involves Nintendo's rumored NX game console.
With sales of the game consoles still going strong, and with new semi-custom revenue coming next year, 2016 is shaping up to be a solid year for AMD's semi-custom business.
Timothy Green owns shares of NVIDIA. The Motley Fool recommends Intel and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.